The Short Answer
Whether you can keep your tax refund after filing bankruptcy depends on two things: which chapter you file and whether your exemptions cover the refund amount. In North Carolina, the wildcard exemption — up to $5,000 in any personal property — can often be used to protect your refund in a Chapter 7. In a Chapter 13, your refund is treated as income and is typically factored into your monthly plan payment rather than taken outright. In most cases, with the right planning, you can protect all or most of your refund.
Well, that depends…it depends on which bankruptcy chapter you file and also on your state’s exemptions. However, usually, you are able to exempt and protect most, if not all, of your tax refund money.
If you file a Chapter 7 bankruptcy, your attorney will try to exempt your tax refund usually with the “wild card” exemption. The wild card exemption has a limit and may have to be used to protect other assets that may be more important. If you cannot fully protect your tax refund then the bankruptcy Trustee may take the non-exempt portion of your tax refunds to pay your creditors. However, in most situations you will be able to fully exempt and protect your tax refund.
The timing of when you file matters as well. If you file in August (assuming you didn’t get an extension), the Trustee is not likely going to look to take a tax refund for the following year. Instead, the Trustees usually look to start taking non-exempt tax refunds in December prior to your to your taxes being due. In other words, the Trustee may be looking at your anticipated tax refund that you would receive in early 2021 at the end of 2020. Again, if you can exempt your anticiapted refund then you will have no problems. If you cannot, then you may decide you want to wait to file the bankruptcy until you no longer have that tax refund money available. It, obviously, would need to be spent on reasonble living expenses.
If you file a Chapter 13 bankruptcy the tax refund is considered income and can affect your court payment amount. It is possible that the Trustee will want to use the refund as part of your payment plan to your creditors. That is typically done by taking your tax refund amount and prorating it over a perioud of 12 months. For example, if you get a refund each year of about $3,000 then we will likely take that $3,000 refund and divide it by 12 to get a monthly average amount of $250.00. That ensures that we use that tax refund as part of your income and, therefore, the Trustee will not want to take your tax refund moving forward. Like in a Chapter 7, if you are expecting a tax refund close to the time of filing the bankrutpcy then you will want to exempt and protect the tax refund in addition to prorating it out over the course of a year’s time.
It is always best to consult an experienced bankruptcy attorney if you think you may be getting a refund before you file. He or she can advise you on your best options to try to keep your tax refunds.
Key Takeaways
- In a Chapter 7, your attorney will likely use North Carolina's $5,000 wildcard exemption to protect your tax refund from the bankruptcy trustee.
- If your refund exceeds what the wildcard exemption can cover, the trustee may take the non-exempt portion to pay your creditors.
- Timing your filing matters — trustees typically start scrutinizing anticipated refunds in December, before tax season arrives.
- In a Chapter 13, your tax refund is counted as income and is usually prorated monthly (e.g., a $3,000 refund becomes $250/month added to your plan payment).
- If you're expecting a refund close to your filing date, you may need to both exempt it and prorate it — an experienced attorney can help you do both.
- Spending an anticipated refund on reasonable living expenses before filing is sometimes appropriate, but only with proper legal guidance to avoid trustee scrutiny.
Attorney Insight
The mistake I see most often is people filing in November or December without realizing the trustee is already thinking about their upcoming spring refund — not just what's in their bank account today. In North Carolina, our Chapter 13 trustees will routinely ask for your last two or three years of tax returns at the 341 Meeting, and if a pattern of large refunds shows up, they'll want that money included in your plan. The fix is almost always planning ahead: if you can get your withholding adjusted so you break even at tax time, you eliminate the problem entirely. A $3,000 refund sounds like a windfall, but in a bankruptcy it can quietly cost you $250 a month for the life of your plan.
